Explore the nuances of successor liability in M&A deals, focusing on the legal case of Varilease Finance, Inc. v. Earthcolor, Inc. This blog simplifies the complexities of Michigan and New Jersey’s successor liability tests, offering insights for professionals in the M&A field.
M&A Stories
January 23, 2019
In this M&A blog, we delve into a legal case that highlights the distinctions between Michigan and New Jersey’s successor liability tests. Our aim is to simplify and clarify this complex topic for entrepreneurs, business owners, CFOs, CEOs, board members, and other professionals involved in M&A deals.
The Parties:
The seller, headquartered in Parsippany, New Jersey, offered commercial printing services. The buyer is a Des Moines-based multi-platform communications company.
The Asset Purchase Agreement:
On September 29, 2017, the buyer entered into an asset purchase agreement with the seller.
Master Lease Agreement:
The seller leased printing equipment in New Jersey and Florida worth over $3.5 million from an equipment company. Before the deal’s closing, both parties approached the equipment company regarding the master lease agreement. The equipment company was asked to consent to the “merger” and provide a copy of the master lease agreement to the buyer. It gave the buyer a copy of the lease and asked the buyer for financial information so it could verify if the buyer was credit worthy. The buyer did not provide the requested financial information and told the equipment company that the seller would continue to make the lease payments.
The Legal Dispute:
The buyer didn’t acquire the seller’s interest in the equipment lease as per the asset purchase agreement. The seller ceased lease payments in late 2017, declaring itself a shell company. The equipment company sued the buyer and the lawsuit ended up in a Detroit federal district court, claiming successor liability for breach of the master lease agreement. The buyer argued it was not liable.
Equipment Company vs. Buyer’s Claims:
The buyer insisted it wasn’t a successor because the master lease agreement was excluded from the asset purchase agreement. The equipment company argued that the buyer was indeed responsible for the master lease agreement under Michigan’s successor liability mere continuation rule. That rule applies if the buyer continued the seller’s business in almost the same way, after the closing.
Court’s Ruling:
The court, applying Michigan law, held that the buyer was not responsible for the lease under Michigan’s successor liability mere continuation rule because Michigan’s rule requires that either the seller or its owners hold an ownership interest in the buyer, after the closing. And that was not the case here.
What’s Next:
The buyer might not be off the hook as the equipment company may sue in New Jersey. Notably, New Jersey’s mere continuation rule does not require that the seller or its owners have an equity interest in the buyer.
Key Takeaway:
Asset buyers in M&A transactions must conduct thorough due diligence to understand and manage successor liability risks. An asset buyer can be held responsible for a seller liability that the buyer did not assume in the purchase agreement under some federal and state successor liability rules. These risks can vary from state to state, making it crucial to be aware of the specific rules in your jurisdiction.
Case Reference:
Varilease Finance, Inc. v. Earthcolor, Inc., Case No. 18-CV-11390, United States District Court, E.D. Michigan, Southern Division, (January 10, 2019).
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
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